China Cracks Down on Virtual Currency, For Real

In the latest blow to online gamers in China, Beijing has prohibited the use of virtual money to buy real world goods.

‬‪‬‪Until now, online game players who win virtual currency have been able to use it to purchase all sorts of things, including real money, giving rise to a burgeoning trade in virtual currency, valued at 10 billion to 13 billion yuan in 2008, according to the China Internet Network Information Centre (CNNIC).

But no more. According to new regulations released jointly by the Ministry of Commerce and the Ministry of Culture last week, virtual currency should be exchanged only for virtual goods and services provided by the issuer of the currency.

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‬‪‬‪Gambling and lotteries involving virtual money are also prohibited under the new rules, which could put a big dent in online game activities. According to Sohu.com, 90% of online games in China include loopholes that allow users to bet with virtual money.

Among the other highlights: The regulations state that online currency issuers should refund the unused virtual money of their users if their products or services are terminated for some reason. Virtual currency is to be used only to purchase other goods or services from the company that issued the virtual money and it may not be used to buy virtual items from any other company other than the original issuer. Companies already involved in virtual currency trading are required to register with the local cultural affairs bureau within three months.

The rules also provide, for the first time, a definition of virtual currency in China (in Chinese here): It includes prepaid game cards, game currencies and game points, while tools and weapons used to play games online are not included. ‬‪‬‪

The latest move to regulate China’s virtual currency market is poised to have more of an impact than last year’s decision to tax the trade. In October, the State Administration of Taxation announced that profits made from buying and selling virtual money would be subject to 20% income tax.

The new rule is intended to limit the negative impact of virtual money on the real currency market, and issuers of the virtual currency have expressed public support for the measures. Internet chat giant Tencent Holdings, issuer of the “QQ coin” – China’s most popular virtual currency – said that the company welcomes the regulation and will do its best to cooperate with the government to curb online crime, according to Sina.com. ‬‪Other online game companies such as Shanda (SNDA) and Perfect World (PWRD) have made announcements stating that the new regulation will promote the healthy growth of China’s online game industry (report in Chinese here).

‬‪Some industry experts, however, doubt whether the regulation will be effective. Internet critic Xin Haiguang noted that a ban on lotteries in online games is likely to have more of an impact on the market, because the gambling element is a major factor in retaining players.‬‪

“To really protect the rights and interests of users, the government should enable players to exchange virtual currency for real money from online game companies,” Mr. Xin said (in Chinese here).

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